Tough IMF conditions push Pakistan stocks down 816 points

KARACHI: The Pakistan stock exchange (PSX) plunged a massive 816 points on Monday — a day after the government announced a $6 billion International Monetary Fund (IMF) package — with the benchmark KSE 100 losing 2.3 percent during intra-day trading and cementing fears that investor sentiments remain bleakly uncertain.
For a few minutes when trading opened, all seemed well with upwards activity and a move into the green zone by more than 500 points before the PSX experienced one of the bourse’s worst bearish spells, pushing the index to close below 34,000 points.
“The market opened on a buoyant note before panic-prone investors started to jettison shares,” said Muhammad Faizan, an analyst and head of foreign institutional sales, Next Capital Limited, a brokerage. He said this occurred due to concerns of tough conditions attached with the IMF bailout package, leading to heavy sell-offs in the market that pushed the index to close at 33,900 points.
Pakistani authorities and the IMF team on Sunday reached a staff level agreement on economic policies to be supported by a three-year agreement for about $6 billion which is subject to IMF management approval and to the timely implementation of the Fund’s conditions.
According to Ahsan Mehanti, Chief Executive at Arif Habib Corporation, a capital market company, “Expected increase in taxes and utility prices, sharp fall in expected growth rate, projections for 6.5-7 percent fiscal deficit to GDP, and expected tightening in SBP policy rates played a catalyst role in bearish close.”
With inflation climbing to over 8 percent, the rupee losing a third of its value over the past year, and foreign exchange reserves barely enough to cover two months of exports, Pakistan was forced to turn to the IMF for its 13th bailout package last year.
Outlining critical steps Pakistan needed to take for fiscal strategy, the IMF said the upcoming budget, to be announced this month, would aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration.
Economists say that impact of the IMF bailout program and the promises made to secure the money by Pakistani authorities will be reflected in this month’s budget.
“The most prominent thing in the budget would be the imposition of around Rs. 700 billion in new taxes,” according to Dr. Hafeez Pasha, former finance minister, who spoke to Arab News on Monday. “The major portion of taxes will be through the reduction of exemptions being given on many items including medicine, medical equipment and fertilizers,” he said, and added that a removal of the exemptions would hugely affect ordinary citizens.
The IMF has asked that Pakistan’s deficit be reduced to between 1-1.5 percent of GDP, which will mean a deficit of up to Rs. 750 billion will need to be curtailed.
“The problem is that what we pay in debt servicing will have to continue as there is no space for reduction. The fiscal space is available in your defense and development budgets and the choice is yours,” Pasha said.
Some experts do believe that the agreement will boost the confidence of investors and end the long prevailing uncertainty from nine months of IMF negotiations. Others say the bearish rule at the PSX is here to stay.
“The movement of currency will now be based on demand and supply bases. At the month end when debt payment nears, we will see shocks in the currency market,” Muzzamil Aslam, a senior economist told Arab News and called for the strong role of regulator.
“As per the real effective exchange rate, the Pakistani Rupee is close to its equilibrium, and there is only 2-3 percent room for further devaluation,” he said.
The IMF forecasts Pakistan’s economic growth slowing to 2.9% this fiscal year from 5.2% in 2018, while the central bank has cut its estimate to between 3.5-4%.
“If there arises any demand and supply issue and the central bank is not allowed to intervene, then the market can do anything,” Aslam said. “We could see Rs.10 appreciation or depreciation in a single day.”